“The Price is Right” CRE edition
by Belinda D. Schuster, CCIM, NWI Commercial Real Estate
One of the first challenges I met when beginning my career in commercial real estate was determining the selling price of a new listing. I would ask seasoned brokers how they set their prices. There was never one answer to the question and it varied widely. I expected a formula, a definitive concrete set of parameters or a specific established process. What I found was dynamic parameters, varied individualistic interpretations of markets and economies. A common answer among brokers “the market” sets the price. Setting a selling price is both art and science.
What is the commercial real estate market? A simple and broad answer is one of space and capital markets. Space as it relates to supply and demand of specific property types and capital as it relates to financing. For example, a market with space constraints may not command the high prices expected unless capital demand pushes the price upward.
I start with researching the macro and micro economies in which the property type is located. Interest rates, inflation, and job creation all influence price at the macroeconomic levels. In an inflationary environment commercial real estate markets tend to do better.
In the short term, equities are increasing in value and corporate profit growth remains steady, despite uncertain leadership in Washington. In turn, the bond market could be expected to lead to higher inflation and increased debt capital. With this macroeconomic information, you might anticipate commercial real estate values to be on the increase. However, this may not be the case for the secondary or tertiary markets.
Microeconomic factors: Demographics, income, employment, supply and demand and population growth all have an impact determining value and price. Each property type (e.g. retail, office, medical, and industrial) has its own supply and demand market conditions.
A broker’s listing/selling price is based on their idiosyncratic knowledge of commercial real estate property types, macro, and micro market research. A selling price is a benchmark or a starting point for negotiating a price in the marketplace. It is heavily influenced by the broker’s quantitative and qualitative interpretation of their location market. Current knowledge of the national economy, local economy, trends, and property type trends are all part of the valuation.
A purchase price for NNN net investment property types will require additional research and knowledge: NOI, going in cap rates, going out cap rates, market cap rates, ROI, cash flow analysis, tenant mix and tenant creditworthiness.
Real estate, in general, is not a liquid commodity, however; the market elements are fluid, dynamic, and constantly changing due to the many variables that influence it. It is up to the Broker to come up with a process that works for them.